Tax-break proposals would give Hong Kong reits a shot in the arm
Tax-break proposals could help city give Singapore and Tokyo a run for their money
If implemented, changes to regulations governing real estate investment trusts (reits) proposed by the Financial Services Development Council in November, could speed up development and further boost Hong Kong's standing as a major international financial centre.
The Hong Kong reit (H-reit) market remains underdeveloped in comparison to many other markets in Asia. As of the end of November, just nine H-reits were listed on the Hong Kong stock exchange, compared with 30 in Singapore and 43 in Tokyo.
Singapore's reits (S-reits) have been busy acquiring offshore assets to expand their portfolios, which has solidified the island state as a focal point for reits in Asia. Singapore also offers specialised industrial and health care S-reits, which are not available in Hong Kong.
South Korea's Lotte Group is reportedly seeking a reit IPO in Singapore. If the plan goes ahead, it will be the largest overseas IPO by a Korean company.
The relatively immature state of the Hong Kong reit market is partially due to the dominance of the major Hong Kong property conglomerates and mainland property developers. At the end of November, H-reits accounted for just 5 per cent of the listed real estate market capitalisation in the city, compared with more 30 per cent in Singapore and Japan.
H-reits' lack of acquisitions, particularly of mainland assets and those in other overseas markets, has also played a significant role in limiting their growth. Also, the restrictive regulatory regime now in place has made H-reits a static income play, passively passing rental income to unit holders.
To ensure Hong Kong remains competitive in the financial market, the new proposals would provide H-reits with greater flexibility to undertake development projects, give them preferential tax treatment and lure more capital from pension funds.